Home Depot, Walmart — What to watch in the markets this week

The U.S. major stock indexes last week closed little-changed, with the Dow and S&P 500 losing some ground and the tech-heavy Nasdaq rallying. Save but for an early Thursday sell-off that was eventually wiped out by that day’s close, there was little market action to write home about.

And yet this calm in the major averages masked what was still a week full of headlines in the business and political worlds.

Snap’s (SNAP) first quarterly earnings report as a public company missed expectations and the stock tanked. Retail names got decimated as Nordstrom (JWN), Macy’s (M), J.C. Penney (JCP), and Kohl’s (KSS) all plummeted after earnings. The XRT ETF which tracks the retail sector lost almost 3% during the week.

Meanwhile, the week’s biggest economic data points — retail sales and inflation in April — missed expectations, while consumer confidence topped estimates.

And President Donald Trump tweeted. And fired FBI director James Comey.

This week, the economic calendar is almost barren, with only a few pieces of housing market data worth noting early on. The political schedule, as always, remains unpredictable, but markets have more or less moved on.

Major earnings reports due out this week will still keep the spotlight on retail and the U.S. consumer.

Headline reports expected out are from Home Depot (HD), Walmart (WMT), TJ Maxx parent TJX (TJX), The Gap (GPS), Ross Stores (ROST), and Ralph Lauren (RL). Major tech earnings next week include Cisco (CSCO) and salesforce.com (CRM).

We noted at the beginning of April that the “Trump trade” had evaporated in markets and that in time investors would return to focusing on things like earnings and economic growth. And here we are.

Influential finance writer and CEO of Ritholtz Wealth Management Josh Brown went even further in a post published on Friday, however. “There never was a real ‘Trump Trade,'” Brown wrote. “I’m sorry if this is like hearing there’s no Santa Claus.”

And as we wrote this week, the idea that a major tax cut will boost economic growth the way the administration hopes is likely misguided anyway. Through time, markets will get excited about lots of things — political shifts, new economic paradigms, wars, etc. Many of these fail to knock stocks off a long-term trajectory of moving higher, usually.

Economic calendar

  • Monday: Empire State manufacturing index, May (7.5 expected; 5.2 previously); Homebuilder sentiment, May (68 expected; 68 previously)
  • Tuesday: Housing starts, April (+3.7% expected; -6.8% previously); Building permits, April (+0.2% expected; +3.6% previously); Industrial production, April (+0.4% expected; +0.5% previously)
  • Wednesday: No major economic data.
  • Thursday: Initial jobless claims (240,000 expected; 236,000 previously); Philadelphia Fed manufacturing, May (18.5 expected; 22 previously); Leading index of economic indicators, April (+0.4 expected; +0.4% previously)
  • Friday: No major economic data.

What corporate America is saying

We’re almost done with first quarter earnings reports.

According to Goldman Sachs’ new quarterly “Beige Book” — styled on the Federal Reserve’s collection of economic anecdotes published under the same name — the U.S. corporate sector during the first quarter saw three major trends get the most commentary from executives: growth, regulation, and labor costs.

“Management teams were mixed in their assessment of whether a much-discussed rekindling of animal spirits since the election has led to a tangible increase in demand,” Goldman writes.

“Most management teams recognized an improvement in sentiment and growth expectations, but many said they have not yet seen evidence that improving sentiment is translating into increased business activity.”

In the first quarter, GDP growth came in at just 0.7%, a disappointing print after the economy grew at its slowest pace in five years in 2016. After the election, we noted that the term “animal spirits,” or a boost in confidence among corporates, was permeating commentary across the business sector.

The problem with animal spirits is that until decisions are made to actually invest more money, hire more workers, or buy other businesses, they remain just spirits.

Or as executives at AT&T (T) said on their first quarter call, “U.S. business investment as a percent of GDP continues to be low. Growth expectations in the economy have been rising, but we’ve yet to see that translate into economic gains or demand… the near-term view is cautious.”

AT&T Inc. CEO Randall Stephenson

The story on regulation was much the same as economic growth: we’re hearing a lot about it, but not sure how much that will mean for business.

“We would have expected sometime over the last couple weeks to have gotten clarity,” said Visa executives during their call held in late April.

“There was supposed to be clarity no later than the end of March on the next chapter of regulation or guidance in terms of how things would have to go forward. And there hasn’t been, and we’ve been told that it will be delayed likely into early May.” On Friday, the Trump administration announced that the U.S. and China agreed to take steps by mid-July to, among other things, allow more access for U.S. companies to provide credit rating services in China. This deal could help Visa.

Other industries, however, did see concrete changes on deregulation, with executives at Boeing (BA) saying, “The overall focus on deregulation and simplifying processes is one that we’ve been a strong proponent for. And the administration has been very engaged across government agencies and with industry to find ideas and ways and opportunities to simplify and streamline. Things like FAA certification processes is one place that we’re seeing some solid progress.”

A dominant economic theme over the last couple years has been the increase in wages for U.S. workers. And while wage increases are still disappointing to some economists, corporates are definitely starting to see the effects on their bottom lines, with Goldman writing that a “growing chorus” of corporate executives noted the increase in labor costs during the first quarter.

Both American Airlines (AAL) and Southwest (LUV) noted higher labor costs, with American executives saying, “Once you start making money, you’ll give more to labor than you did when you were making less money, and they’ll take some of the upside that should go to shareholders… This is getting to a level of compensation across the industry that needed to occur.”

Commentary from hospital operator Universal Health Services (UHS), however, perhaps sounds most like what economists looking for signs of inflation would be on the lookout for.

“The current expense load does incorporate some investment in solving the labor shortage problem,” the firm said, “meaning in wage increases in certain markets that we’ve had to make to be competitive.”

And that’s really what’s at the crux of wage increases: can you maintain competitiveness at your current talent level and rate of turnover, or will it take something else for your firm to be competitive?

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland

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